July 10 (Bloomberg) -- The ruble weakened the most since February as oil prices dropped, Russia cut interest rates and the budget deficit widened in the country’s worst economic slump in a decade.

The currency depreciated as much as 3.1 percent to 32.7649 per dollar, extending losses in the worst week since January. The 30-stock Micex Index sank to a three-month low.

Oil, Russia’s main export, fell 1.5 percent to $59.48 a barrel, bringing this week’s slump to 11 percent as concern deepened a prolonged global economic slowdown will damp demand for fuel. Bank Rossii cut its main rates for the fourth time in less than three months as the country slips into its first recession in 10 years. The budget gap widened as shrinking export revenue curb the state’s income.

“The drop in oil prices is a very negative factor for the Russian economy and the currency,” said Elisabeth Gruie, an emerging-markets currency strategist in London at BNP Paribas SA, France’s biggest bank. “Lower oil revenue means less foreign currency flows into Russia, which makes for a bigger budget deficit and reduces the central bank’s ability to defend the ruble.”

Higher U.S. gasoline stockpiles over the Independence Day weekend, the peak of the summer driving season, and unexpected declines in U.K. factory production and Japanese machinery orders added to evidence that economies may be slow to rebound from the first global recession since World War II.

“We are seeing a reversal of global expectations of a fast recovery,” said Vladimir Osakovsky, a Moscow-based economist for UniCredit SpA.

Cutting Rates

Russia’s central bank cut the refinancing rate today to 11 percent from 11.5 percent and the repurchase rate charged on central bank loans to 10 percent from 10.5 percent effective July 13.

“The cut in interest rates signals that the central bank is worried about economic growth and that, along with the budget deficit, adds to the negative sentiment towards the Russian economy,” BNP’s Gruie said.

Bank Rossii drained more than a third of the country’s foreign-exchange reserves from August to January, slowing a 35 percent devaluation of the currency as a worsening global economic crisis sapped demand for fuel. Speculation the worst of the crisis had passed helped spur a rally that more than doubled the price of oil from this year’s low in January through the end of June, stoking gains in the ruble.

Deficit Widens

“The green-shoots debate has all but died out in recent days, leading to sharp outflows from the emerging markets, including Russia, putting pressure on the ruble,” said UniCredit’s Osakovsky.

Russia’s budget deficit widened in the first half to the equivalent of 4.2 percent of gross domestic product as the government spent 753.6 billion rubles ($23.4 billion) more than it collected, Finance Ministry said today, citing preliminary figures. The gap will reach about 8 percent of GDP, Prime Minister Vladimir Putin said on June 28.

Stock investors pulled more than $500 million from emerging-market funds in the week ended July 8, according to data compiled by Cambridge, Massachusetts-based research firm EPFR Global.

The 30-stock Micex index slumped 2.8 percent to 871.33, extending this week’s slide to 11 percent.

The ruble fell 3 percent to 32.7625 versus the dollar as of the 5 p.m. close in Moscow, bringing this week’s decline to 4.8 percent, the most since the week ending Jan. 30. The currency slipped 2.4 percent to 45.5763 per euro today, leaving the ruble at 38.5226 versus the central bank’s dollar-euro basket, the weakest in more than two months.

Raising Bets

The basket, which is used to manage swings that hurt Russian exporters, is calculated by multiplying the dollar’s rate to the ruble by 0.55, the euro to ruble rate by 0.45, then adding them together. The ruble remains within the 26 to 41 band the central bank pledged Jan. 22 to defend.

Investors increased bets of a weaker ruble, with non- deliverable forwards showing the currency 2.8 percent weaker at 33.64 per dollar in three months, from an NDF of 32.06 on July 3. The contracts are a guide to expectations about currency movements as they allow foreign investors and companies to fix the exchange rate at a particular level in the future.

In a week, the ruble will be at 32.38 per dollar, compared with a forecast of 31.33 a week ago, the data show.

To contact the reporter on this story: Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net

Last Updated: July 10, 2009 11:13 EDT